Free trade not cost-free as tariff revenues disappear

Prime Minister Tony Abbott's success at clinching long-sought-after free trade deals with our major trading partners will expand Australian export markets and make imports cheaper. However, it has also made his budget task harder in the immediate term – to the tune of as much as $2.4 billion in tariff revenue foregone.

Two separate pieces of analysis, one last year by the public service, and one more recently by a public policy advisory panel, have identified revenue shortfalls associated with the deals mostly flowing from the removal or reduction of import tariffs.

This fiscal downside is the little known aspect of the otherwise positive stories about freer trade, more jobs, lower prices, and better growth.

In the case of the recently agreed, but yet to be signed, Economic Partnership Agreement with Japan, the main concession from Canberra came in the form of the removal of the 5 per cent mark-up on Japanese cars sold in Australia.

Related Content

Under the deal, that tariff will be removed as soon as the deal becomes operative on three-quarters of imported Japanese vehicles and quickly phased down to zero for the remaining 25 per cent.

That's a potential win for car buyers and purchasers of high-tech consumer items such as cameras, computer equipment and televisions. But it's not so great for the public purse – at least in the short term.

Advertisement

Previously unreleased Finance Department analysis, undertaken for the former Labor government, concluded that the cost to consolidated revenue from tariff removal would be as high as $1.665 billion over the forward estimates – the four-year budget period. However, the modelling was necessarily limited by the fact a free trade deal had not yet been struck and therefore details were not known.

The advice found the shortfall could be as high as $1.6 billion, or it could come in much lower at $630 million in tariff revenue foregone, over the same four-year period.

According to the same generalised assessment, the Korea-Australia free trade agreement signed last Tuesday, was expected to cost the budget more than $200 million a year, putting its negative impact on revenue over the next four years at about $900 million – though the Finance Department modelling was again necessarily crude as the final details of the deal were not known.

The government argues the potential benefits of freer trade, including access to huge new markets overseas, mean economic growth will quickly account for the direct losses of tariff income foregone.

More recent modelling on the Japanese deal, undertaken by the Australia Institute, found the cost to Canberra from not getting tariff income from Japanese cars alone was $1.2 billion over the next four years.

The Australia Institute also crunched the numbers on South Korean cars and advised that in the 12 months to February 2014, Australia imported vehicles ''with a custom value of $1978.2 million''. It said the 5 per cent tariff on South Korean motor vehicles should be worth $98.9 million a year.